Brazil hit by fresh political crisis, creates upside risks for USD/BRL currency pair


Brazil hit by fresh political crisis, creates upside risks for USD/BRL currency pair

Friday, May 19, 2017 6:45 PM UTC

On Thursday, Brazil was rocked by fresh political crisis following fresh corruption charges reached President Michel Temer. Temer was accused of endorsing the payment of money to the imprisoned former speaker of the lower house of Congress, to ‘silence’ him in the ongoing corruption probe, noted Danske Bank in a research report.  One of the biggest Brazilian newspapers’ website posted an audiotape that purports to be of the President discussing the alleged payoff. Termer stated on Brazilian TV that he commits to hold onto his power and prove his innocence, noted Danske Bank.

The new political crisis has come at a worse time for the Brazilian economy. Temer’s government is in the midst of executive extensive fiscal reforms to address the considerable fiscal challenges that have been gathering in the last decade with the Lula-Rousseff governments. The fiscal deficit has been hovering near 9 percent of GDP, while public debt levels at 70 percent of GDP.

At the end of 2016, the Brazilian government had adopted a spending gap, while widespread pension reforms are presently being discussed.  A fragile rebound of the Brazilian economy has begun on the back of government’s reform as business and household sentiment have improved. The Brazilian real’s outlook and the outlook of Brazilian assets rely on the President’s ability to deflect the allegations in the next few days.

“The latest bout of political uncertainty creates upside risk to our forecast for USD/BRL of 3.30 by end-June”, added Danske Bank.

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